What VantageScores are, how they work

Newly updated, rival to FICO takes 'thin file' data into account

FICO scores may get all
the attention. However, VantageScores are becoming more widely used by lenders,
say experts.

Developed in 2006 by
the three major credit bureaus, Experian, TransUnion and Equifax, the scoring
model still struggles to catch FICO in popularity. FICO, which has been around since 1956,
"is still the most commonly used scale or scoring system," says Steve
Brobeck, executive vice president of the Consumer Federation of America.

However, interest in
the VantageScore has surged, says VantageScore spokesman Jeff Richardson,
thanks in part to a 2013 update -- dubbed VantageScore 3.0 – that adopted the
same point scale used by FICO (300 to 850). The latest iteration of
VantageScore also introduced a number of consumer-friendly updates. For
example, it ignores debt collection
accounts that have been paid off and forgives late payments that occurred
during a natural disaster.

“I think 3.0 really
caught fire,” says Richardson. Between 2014 and 2015, usage of the VantageScore
more than doubled, he says, with users pulling roughly 6 billion scores for
lending decisions and other credit score services, such as marketing. Seven out
of 10 of the largest banks currently use the VantageScore, according to the
company’s latest estimates, up from six of the largest banks in 2014.
Meanwhile, a number of major credit card issuers and personal finance websites
are now giving
away VantageScores for free, including Capital One, USAA and CreditCards.com.

As more banks and
personal finance websites compete for users by sharing free credit scores, the
market for VantageScores -- and the way the scores are used -- is also rapidly
expanding. “Free credit scores have proliferated, which is a good thing,” says
Richardson. “The role of credit scoring is changing. It’s both a decision-making
tool and an educational tool for consumers.”

If you recently
received a free VantageScore from
a credit card or personal finance company -- or if you know a particular lender
is using it -- here's what you need to know:

1. The VantageScore you buy may be a different
version than the one your lender uses. Since 2006,
VantageScore has gone through two major updates – the most recent one occurring
in 2013. As a result, lenders may access more than one kind of VantageScore,
and the version you see to check how your credit score is doing may not be the
one your lender uses.

"It's not uncommon
for scoring companies to develop new models and updates to their models as the
environment changes," says Rod Griffin, director of public education at
Experian. "I think it's very important for consumers to understand there
are many different credit scores."

Components
of a VantageScore

(Click image to enlarge)
Infographic courtesy of VantageScore.

In 2010, for example,
the company introduced the VantageScore 2.0, which was developed, in part,
using recession-era data that captured how people used credit just before the
recession began and what they did just after the economy tanked.

To take into account
the new, more volatile economic landscape, VantageScore began placing
significantly more weight on recent credit behavior, such as how many times in
the past few months you've applied for credit and how you've been doing lately
with the credit you already have.

In March 2013,
VantageScore changed course and introduced VantageScore 3.0, which placed less
emphasis on recent credit history and instead focused more heavily on overall
payment history and the age, type and percentage of credit borrowers use.

VantageScore's new
version also includes more nontraditional data, such as public records
information, so that borrowers who don’t have recent credit data can still be
scored. "We wanted to take advantage of a broader, larger data environment
at the credit bureaus," says Davies.

In addition, different
types of trade lines -- such as student and auto loans, or first mortgages and
home equity lines of credit -- are now treated differently, says Davies. For
example, "we now look at student loans independently of other types of
installment loans," she says, because "student loans are much more
risky than auto loans."

The greater emphasis on
what kinds of loans you're taking out is designed to give lenders a closer,
more intimate view of borrowers, says Davies. "We put a bit more scrutiny
on the data than I think conventional scores."

VantageScore
2.0 was developed, in part, using recession-era data that captured how people
used credit just before the recession began and what they did just after the
economy tanked.

To
take into account the new, more volatile economic landscape, VantageScore began
placing significantly more weight on recent credit behavior, such as how many
times in the past few months you've applied for credit and how you've been
doing lately with the credit you already have.

For
example, if you have a long history of paying your bills on time, but recently lost
your job and began to struggle, your VantageScore 2.0 is likely
to take a bigger hit than your other credit scores.

2. There's a new VantageScore, and it weighs your credit history differently. In March 2013,
VantageScore changed course and introduced VantageScore 3.0, which placed less
emphasis on recent credit history and instead focused more heavily on overall
payment history and the age, type and percentage of credit borrowers use.

VantageScore's new
version also includes more nontraditional data, such as public records
information, so that borrowers who don’t have recent credit data can still be
scored. "We wanted to take advantage of a broader, larger data environment
at the credit bureaus," says Davies.

In addition, different
types of trade lines -- such as student and auto loans, or first mortgages and
home equity lines of credit -- are now treated differently, says Davies. For
example, "we now look at student loans independently of other types of
installment loans," she says, because "student loans are much more
risky than auto loans."

The greater emphasis on
what kinds of loans you're taking out is designed to give lenders a closer,
more intimate view of borrowers, says Davies. "We put a bit more scrutiny
on the data than I think conventional scores."

3. You can tell which kind of VantageScore
is being used based on the scale that's used to score you.If you purchased a
VantageScore before 2013 and then later received another VantageScore, you may
have noticed a major difference in the scores. That's because the old
VantageScore scale is different, says Griffin.

For example, if your
lender is using VantageScore 2.0, the lowest possible VantageScore is 501 while
the highest possible score is 990.

A lot of other scores require at least six
months of behavior to develop a score. VantageScore
can score you in as little as a month.

--
Sarah Davies
VantageScore

VantageScore 3.0, by
contrast, uses the same scoring scale as FICO, which ranges from 300 to 850.

The new VantageScore is
currently available to all lenders, but not every lender chooses to use the
latest version. So if you're denied credit or are offered subpar terms on a
loan and receive a free score as a result, you may find that the score that was
used to rank you is still based on the older VantageScore scale.

"Lenders choose
which scoring models work best for them," says Griffin. "We hope that
lenders will adopt and adapt to the new version over time." However,
"you won't see a wholesale switch," he says. "It takes some
time."

Typically, when you
receive a VantageScore, the company will also give you a list of risk factors,
says Experian's Griffin, that will help you better understand your score.
"Focus on the factors, not on the number," he says. "The risk
factors are what empower you to act." You can also visit reasoncode.org for a more
complete explanation of the risk factors listed with your score, he says.

4. Even
if you have a thin credit file, you may still have a VantageScore.Another aspect that
sets VantageScore apart from its competitors, such as FICO's traditional
scoring model, is that it will score consumers whom other credit score
providers call "unscorable," says Davies. "Our model is able to
use, let's say, very sparse information about a consumer and still calculate
the score for them."

For example, if you
just got your first credit card a few months ago, you may already have a
VantageScore. "A lot of other scores require at least six months of
behavior" to develop a score, says Davies. "VantageScore can score
you in as little as a month."

VantageScore will also
generate a score even if the last time you used credit was a year ago.
"Most scores require you to use credit within a six-month window,"
says Davies. VantageScore, in contrast, will look at up to two years of
behavior to calculate a score.

This is important, says
Davies, because it gives consumers with thinner files, such as recent graduates
or people who rarely use credit, a chance to work within the system. Otherwise,
"in order for a lender to work with you, they put you through a manual
process which is more expensive, time consuming and, invariably, a more
complicated process," says Davies.

VantageScore 3.0's
fresh emphasis on nontraditional data also helps calculate scores for a
substantially larger number of consumers. “The model scores 30 to 35 million
more consumers than any conventional model,” says Richardson. Within that
population, VantageScore estimates nearly a quarter of potential borrowers may
handle credit relatively well, despite not having a traditional credit score.
“There’s a large population of consumers who our competitors aren’t scoring who
actually have good scores,” says Richardson.

5. One
person's negative mark may be scored differently than another's. If something out of
your control, such as unemployment or medical debt, forces you to declare
bankruptcy, your VantageScore will suffer. However, the damage may not be as
bad as someone who has had a long history of managing credit badly, says
Davies.

The
most important thing to know about credit scores is while numbers tend to be
very different, the risk factors tend to be very similar from one scoring model
to another. So if you address those risk factors,
your credit scores will get better.

-- Rod Griffin
Experian

"One of the things
we do in the model is we try to estimate who had to file for bankruptcy, but is
a lower risk situation," she adds. Their score will be affected, "but
because that was a one-time event, I'm going to assume they've actually been
doing well with all their other debts, and so I'm going to assume that they are
going to recover much faster."

By contrast, people who
have habitually missed payments and run up their credit cards probably won't
see their scores recover as quickly from the credit score bankruptcy damage.
"We're looking at their behavior in slightly different ways," says
Davies. Consumers who have had a short run of bad luck "should not be
penalized in the way that someone who has been living on the edge" would
be, adds Davies.

If you're a victim of a
natural disaster, your VantageScore 3.0 also won't punish you for any late
payments you make as a result.

In addition, if you pay
off a collection account, the latest version of VantageScore will forgive you
for that, too. "If you have paid off your debt that was placed at a
collection agency, we essentially ignore the fact that the debt was ever
there," says Davies.

6. Your actions matter more than your
VantageScore.Regardless of what type
of VantageScore you obtain from a personal finance website or receive from a
lender, the three-digit number that you see matters far less than the way you
use credit and handle your everyday bills, say experts.

"The most
important thing to know about credit scores is while numbers tend to be very
different, the risk factors tend to be very similar from one scoring model to
another," says Griffin. So, if you want to improve your overall credit,
focus on the risk factors rather than the scores.

If you receive a free
VantageScore and begin monitoring it regularly, don’t get too hung up on the exact
number either, says Richardson. “It’s easy to get into an obsession over that
score and then you start managing your behavior over that score,” he says. But
you’re better off focusing on the larger picture rather than occasional swings
in your credit score. “Practice good credit behavior and your score will follow
suit.”

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